One common refrain I hear when I talk with people about estate planning is the desire to avoid probate. Probate avoidance isn’t necessarily a bad idea, but it does come with its own set of dangers. Probate can be avoided several different ways, but the way I’m going to focus on in this post involves placing property in joint tenancy–meaning that property is owned jointly by more than one owner–in order to have it pass to the other joint tenants when one tenant dies. While it can be tempting to add joint tenants to property as a low-cost estate planning solution, it comes with its dangers.
What could go wrong?
Having the wrong type of joint tenancy
There are–at least in Missouri–three different types of joint tenancy:
- Joint tenancy with right of survivorship
- Tenants in common
- Tenants by the entirety
Joint tenancy with right of survivorship (which I’m going to call “JTWROS” from here on out) and tenants by the entirety–a type of joint tenancy specifically reserved for spouses–both bypass the probate process, but tenancy in common does not. Let’s say that two people own a piece of property in a joint tenancy. In a JTWROS situation, if one of those people dies, the other becomes sole owner of that property. In a tenancy in common, if one of those people dies, the portion owned by the deceased person would become part of that person’s estate and pass through the probate process.
Adding a joint tenant gives that person control over your property
When you add a joint tenant to property, you are giving that new tenant all the rights of ownership. That can create a risk of the new joint tenant using or disposing of the property in a way the original owner hadn’t planned, but that’s far from the only potential problem. If the new joint tenant gets divorced or has creditors, they may be able to obtain a portion of the property held jointly. Additionally, if you later want to sell the property or withdraw funds from a jointly-held account, you may need the other tenant’s approval to do so.
Adding a joint tenant may be a taxable gift
The federal government taxes gifts made over a certain amount. A “gift,” in this context, occurs when one individual transfers property to another individual and gets less than full value in return. There is no tax for gifts under a certain amount per recipient; for 2014, you may give up to $14,000 to a person before you would be liable for the gift tax. When you add a new joint tenant to property, you have given that person an interest in the property now, and if that interest is greater than $14,000, a gift tax would likely apply. If a gift tax does apply, that tax is generally paid by the giver, not the recipient.
Passing property through joint tenancy might cause an unintended allocation of estate assets
Forbes tells the story of a family fight caused by joint tenancy and “payable on death” accounts (which are essentially what it says on the tin: an account that, upon the death of the account owner, is to be paid or transferred to whomever the account holder named as their beneficiary). In that case, a deceased woman left a will dividing her estate equally between her five children, but named one of the kids as a joint tenant on a CD and a credit union account and that same kid and two others as beneficiaries on an annuity, leaving two kids out. The two kids that were left out of those assets were not pleased, and the matter went to court. Is that what the deceased woman intended? It might have been, but it might have been an accident, and perhaps she would have done it another way if she’d known what the allocation ultimately would have been. As the article goes on to point out, some families might take it upon themselves to fix what appears to be a mistaken allocation, but doing so can be costly for those beneficiaries.
Although placing property in joint tenancy is a quick, inexpensive way to keep property out of your probate estate, it should be done carefully–if at all–to minimize the risks it presents, and you should make sure that it fits with your overall estate plan.
Photo credit: flickr user Nicolas Esposito, http://www.flickr.com/photos/nesposit/2787559303/, licensed under http://creativecommons.org/licenses/by/2.0/ (and yes, that’s a screenshot of the game Pitfall! by Activision)